Lessons I have learnt (so far) playing a stock market competition

I am currently taking part in a stock picking competition in South Africa. It has some great prizes, and it is fun. It runs over 8 months, and each month there is a cash prize for the top 3 places. First monthly prize is approximately US$2000 (R30000), second $1000, third $350. After 8 months, the person who does best overall, based on your position each month, wins a vehicle worth about $25000, so not too bad at all!

You can see a link here to the competition leaderboard, (I am entered as DividendTycoon (what else!) and out of the roughly 1250 entries I am currently (although it changes minute by minute) around 17th place for June)  http://www.sharenet.co.za/v3/stockpicks/index.php?facebook=, and 5th in the overall competition (click on http://www.sharenet.co.za/v3/stockpicks/index.php?id=3&facebook=). I am more than happy with this as I am certainly still in with a shot at the vehicle. The great thing is that you make your 5 stock picks, and then you do not have to do anything else for the month, there is no active trading other than picking which 5 stocks you believe will do best that month. The only downside is that it is slightly addictive tracking my movements up and down the leaderboard, and in fact it is this that gave me the idea for this post.

What have I learnt?

  • The short term is meaningless when it comes to picking stocks. The changing of positions on the leaderboard over a month is quite eye opening. I have gone from being in the top 100 places, dropped to 800th, then back up to 13th place over the course of a month, others have been even more volatile. It is simply too short a time frame to know what a stocks performance will be. This is why I believe selecting good stocks for the long term trumps day trading anytime. Over any month you may lose money investing in Starbucks, but will you lose over a decade?

I do believe there is a place for trading in order to generate extra capital, but your time frame should be more than a month, and you should do the same research on the stock as you would as if it was a long term stock. The stock that is doing best for me this month, a hotel and casino stock, Sun Interational (SUI) is up 22% this month, at the time of writing. It is part luck, but I also felt it was simply too cheap based on my fundamental research, and while not guaranteed, I felt it had a good chance of rising over the month.

  • Anybody can be lucky in the short term, or unlucky. Quite simply you can be lucky with some of your stock picks, and for others you can be very unlucky. Some great blue chip stocks that people have picked in the competition have gone down over 10% in the month, but look at any chart over 10 years and they are up many hundreds of percent. My girlfriend happens to be in 9th place in the overall (not June) competition. She picked her own stocks. Now I am sure she will not mind me saying that stock picking is not her strong point, her entry is little different to her odds of winning a lottery with around 1250 participants. However, she is doing remarkably well! That is mostly luck, and with any luck she will not read this post..she has named herself “Super Demagogue” after all..
  • Day trading must be exhausting. I must admit that I have spent too much time the last few months getting live prices on the stocks I hold for the competition, as well as those of my closest competitors. Refresh, refresh, check the prices, check my position, it really is exhausting. It leaves less time for research and reading. This makes it not much different from gambling. I think I would be a much better investor if I turned off the stock ticker, or more appropriately shut off my online portfolio for the majority of the day. There is really very little point in the hourly monitoring of the prices of stocks you wish to hold for at least 5 years. The time would be far better spent researching new stocks or industries.
  • I need to know the shares I invest in. As I said in the last point, I was watching my competitors stocks as well as my own. A week ago the competitors who held gold mining stocks suddenly raced up to the top of the leaderboard. It was rather disheartening as I watched my position slip further and further down. This led me to finding a website which displayed the gold price in real time. I could see the problem, the gold price had suddenly spiked over $20 due to a jobs report in the USA… and now it was affecting my competition! The world is an unfair place sometimes.

Anyway, fast forward a week and I sat in silent joy as I watched the gold price plummet back down, and my position started going up. The point though is, that I could never invest in gold shares, or any commodity shares for that matter, simply because I feel I am in no way in control of my investment. I could not tell you whether gold will be $200 dollars more per ounce this time next year, or $200 less. Will Nestle sell more instant coffee next year? Yes, they will. I certainly know I cant stop drinking the stuff very easily.. An increase in the Nestle dividend will follow no doubt. I like to know my stocks and be able to fairly accurately predict where they are heading. Dividends flow from profits, so this is important. Do not let your dividends be at the mercy of inflation reports, federal reserve decisions or the number of unemployed people in Japan.

  • Anchoring is dangerous. Anchoring is believing that what happened in the past will continue into the future. I have noticed that the stocks that have done the best in the previous month seem to be the most selected stocks for the next month. This may in certain instances be justified, but on the whole it is not a good idea to buy a stock because it has already gone up. If anything, look for the stocks that have recently bombed out. As a Dividend Tycoon, you have to think differently, look for what offers value, not what is currently popular.

Conclusion

Things change rapidly in this competition, so by the time you read this I may have bombed out this month. But the final thing I learnt from the competition is that I really really want to win that vehicle! However, I have realized my chances are probably slim due to the element of luck involved and the difficulty of trying to make short term predictions, but you never know, and boy that vehicle would be a very special dividend!

Anne Scheiber: An amazing, but slightly tragic, Dividend Tycoon

Readers who have read many personal finance and investing articles may well have come across the story of Anne Scheiber before, but I think it is worth having a look at her life in the context of being an inspiration to anybody wanting to become a Dividend Tycoon, yet taking into account the lessons from her story on why balance in life is also important.

A brief overview on the life of Anne Scheiber

She lived in New York, and when she was in her thirties, at the time of the great depression, she lost all her money she had entrusted her brother to invest for her. She managed to save $5000 from her modest paying IRS auditing job, and started on her own investing path in her forties with this and her $3150 annual pension. She also lived till 1995 – to the age of 101.

The amazing part

On her death it was established that her investments were worth $22 million!  This was established as she left the money to Yeshiva university to help women in need, even though she did not herself attend the university.

To turn $5000 into $22 million is obviously no easy feat, so she must have done many things well. Looking at what has been written, I would say the most important would be:

  • Not selling her dividend paying stocks or trying to time the market. She did not sell out during the numerous crashes she would have experienced during her lifetime. This is not easy when the world is crashing around you, but history has confirmed that the dividend aristocrats such as Coca-Cola are not badly affected on an operational level, and continue to pump out both profits and dividends, so why sell when the stock price tanks? You would not sell your profitable McDonald’s franchise because the share market falls 30%.
  • High savings rate. Unfortunately it takes money to make money. For the ordinary person the only source of capital is normally saving part of your income. In Anne Scheiber’s case her saving rate was around 80%. This is incredibly high and by all accounts she was extremely frugal and spent very little on herself. She is obviously an extreme case, but it does show what is possible.
  • She attended shareholder meetings which were based in New York. Now apparently this was partly to obtain free food and refreshments.. well she did turn $5000 into $22m, and as per my previous point you have to think she did some unconventional things! But I think she was also genuinely there to monitor her investments. Attending AGM’s has helped me gain a better feeling for companies I have invested in, sometimes you need to see the body language of directors, and reading only gets you so far. I would put attending AGM’s in the same camp as visiting your dividend machines, see my earlier post on this subject: http://www.dividendtycoon.com/blog/2016/04/22/visiting-your-dividend-machines/
  • She invested in top quality brands, such as Coca-Cola, Pepsi and Schering -Plough (the pharmaceutical company). Therefore the companies themselves compounded earnings, paid out generous dividends, which she reinvested. In later years she also invested in tax free municipal bonds.
  • So what did being a Dividend Tycoon do for her finances on a cash flow basis? At her death, her dividend and interest income was $750000 per year. Think about that $62500 coming to you every month, whether you get out of bed or not in the morning. No wonder she lived till 101! And she started with only $5000! This just shows the power of compounding. Even if you are not as dedicated as Anne Scheiber, you can get a pretty good result if you allow compounding to take its course. It is not get rich quick, but it is likely you will do well if you do the right things.

The slightly tragic part

Well I said that with $62500 (in 1995) coming through the door every month, she was likely to be happy, which would have contributed to her long life. From what I have read though she does not appear to have had much of a life, although I do not feel one can judge whether she was happy or not. She was a recluse who had no friends and had shunned family, her only real contact being those people who in some way administered her wealth such as stockbrokers. This strikes me as rather tragic, and a waste, surely she should have at least had some pleasure from her wealth such as travel and sharing meals with friends?

My conclusion

I admire the fact that she gave her fortune to a good cause, and in general one would have to say that she gave more to the world than she took out. Besides money, she also left great lessons. Any aspiring Dividend Tycoon can get inspiration from how she compounded her wealth. But she also left the lesson that balance is important and that it is okay to use some of the money for things that are meaningful to you, especially once you are already wealthy and not still in the building phase.

In conclusion, I would have loved to have been able to sit down and have a cup of tea with Anne Scheiber, to discuss her investments, her strategy and her outlook on life. I think it would have been fascinating, even if I would most likely have had to take along my own tea bag..

 

 

Dividend update – May 2016

Firstly, apologies on the late update. I have been giving some thought as what to do in terms of providing a monthly update. I am not sure whether readers are actually interested in seeing my dividend income, or whether you come to the site for articles about investing.

In addition, my plans for dividend income from US and UK stocks has been somewhat delayed, and it is slightly pointless giving updates when nothing is happening. Currently my preference has been to invest in my home country stocks as there are some stocks with great growth prospects and high dividend yields. For example I have invested in a real estate stock giving an initial 14% dividend yield and I find such opportunities difficult to pass up. Longer term I think the cash flow from these higher yielding stocks will find its way to the international stocks that I am wanting to buy, but in the short term I am trying to be disciplined and not buy stocks because they will look good on my blog.

My cash flow was also dealt a blow by my investment into an illiquid hotel counter which I wrote about in my last post, see here http://www.dividendtycoon.com/blog/2016/06/04/reflections-on-buying-a-cheap-hotel/  I will need to be patient on this investment before I can sell some stock.

I have decided I will keep providing the updates, although any feedback would be welcome as to what you would like to see. However, I must confess that progress is likely to be slow and it may be some time before I start to post dividend income.

I hope you will continue to read the blog though, and find inspiration here towards becoming a Dividend Tycoon in your own way.